A resilient economy will be boosted by long-lasting ceasefire

The 15-month conflict has had substantial effects on the Israeli economy. As a ceasefire was agreed upon in early January 2025, the economic rebound will depend on the dynamics of its implementation. Additionally, internal politics of the Israeli government could play a crucial role in determining the duration of the ceasefire. 2024 was marked by volatility due to the conflict, resulting in estimated growth of +0.5%. In 2025, growth is expected to rebound to +3%. However, several sectors of the economy remain severely impacted, particularly tourism and construction, as well as regions on the front lines, which have been the hardest hit since October 2023. In 2024, an economic contraction was mainly avoided due to a surge in government consumption. In 2025, the economy is expected to begin rebalancing, private consumption is expected to gradually return and some initial private investment should resume. Nonetheless, economic prospects remain contingent upon the progression of the conflict.

Israel is the third-largest economy in the Middle East after Saudi Arabia and Türkiye, and is an open and developed market, with critical capabilities in high-tech goods, business services and defense, as well as a diversified export base and a highly skilled labor force. Annual per capita income exceeds USD50,000, and real GDP has grown at an annual rate of +4% on average over the last 15 years. During the global Covid-19 pandemic, Israel fared well, which already demonstrated the solid fundamentals that have increased the economy’s resilience to shocks despite continuous military confrontation.

Inflation dropped during 2024 to 3.2% y/y, and it is forecasted to continue lowering to 2.6%, entering the central bank’s 1.0–3.0% target band. The policy rate is likely to fall below 4% by the end of 2025, and it could loosen faster if the most affected economic sectors do not rebound. The unemployment rate remained at a record low of 2.7% in November 2024, indicating a labor shortage because of border closures and the high levels of military enlisting.

Israeli society has experienced divisions that have persisted even during times of conflict. Prior to the Hamas attacks in October 2023, debates surrounding a judicial reform aimed at adjusting the balance between the judiciary and legislative branches sparked social tensions. Although protests have since subsided, underlying divisions remain, with potential to resurface as military operations decrease. During the conflict, new societal challenges emerged, such as discussions around military service for ultra-Orthodox communities, which led to some opposition and protests. Politically, the national unity government faced changes when opposition leader Benny Gantz exited, though the coalition continues to maintain a majority in the Knesset. The government, led by Prime Minister Netanyahu, navigates internal differences within its coalition, particularly between Likud and smaller right-wing parties.

Over the past 15 months, the government and central bank have implemented measures to sustain economic activity amid conflict. These measures include postponing loan repayments and offering interest-free loans to sectors and households affected by the war, helping to maintain the health of the banking sector. However, challenges persist as commercial banks have increased their holdings of government bonds, raising their exposure to sovereign risk.

The technology and defense sectors remain dynamic parts of Israel's economy, heavily reliant on venture capital investments. However, tech start-up investments have seen a decline, reaching a five-year low in early 2023, reflecting broader global economic trends and challenges within the sector.